Archive - Jun 2010 - Story

Even as the idiots at the SEC mope about cluelessly, confirming they deserve not one cent of taxpayer money to fund their massively overbloated budget, and should all be summarily fired to collect tarballs in the Gulf of Mexico (and soon Maine), our friends at Nanex have conducted an exhaustive analysis (must read for everybody concerned about market structure), in which they identify the various parties responsible for the market crash, and, drumroll please, High Frequency Trading stands at the pinnacle of culprits for the 1,000 point Dow drop. From their findings: "While analyzing HFT (High Frequency Trading) quote counts, we were
shocked to find cases where one exchange was sending an extremely high number
of quotes for one stock in a single second: as high as 5,000 quotes in 1
second! During May 6, there were hundreds of times that a single stock had over
1,000 quotes from one exchange in a single second. Even more disturbing, there
doesn't seem to be any economic justification for this. In many of the cases,
the bid/offer is well outside the National Best Bid/Offer (NBBO). We decided to
analyze a handful of these cases in detail and graphed the sequential
bid/offers to better understand them. What we discovered was a manipulative
device with destabilizing effect." In other words: enough with all the bullshit about HFT as a liquidity provider mechanism: in reality this is just a facade for the most insidious, computerized market manipulative device ever created. Nanex' conclusion: "What benefit could there be to whomever is generating these extremely high
quote rates? After thoughtful analysis, we can only think of one. Competition
between HFT systems today has reached the point where microseconds matter. Any
edge one has to process information faster than a competitor makes all the
difference in this game. If you could generate a large number of quotes that
your competitors have to process, but you can ignore since you generated them,
you gain valuable processing time. This is an extremely disturbing development,
because as more HFT systems start doing this, it is only a matter of time
before quote-stuffing shuts down the entire market from congestion. We think it
played an active role in the final drop on 5/6/2010, and urge everyone involved
to take a look at what is going on. Our recommendation for a simple 50ms quote
expiration rule would eliminate quote-stuffing and level the playing field
without impacting legitimate trading."

"It is literally raining oil" proclaims the narrator in this RT video, who observes what appear to be puddle of oil following a heavy rainfall in the Louisiana area. We have not received independent confirmation of this phenomenon elsewhere but this is very troubling, and certainly possible considering the amount of oil burned and washed ashore as part of the spill recovery effort.

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 22/06/10

We are delighted to present for your reading pleasure the following ultra comprehensive report on gold, submitted by its author - Erste Bank's Ronald Stoeferle. In addition to covering all the usual bases, the report has a dedicated section on a topic receiving extensive prominence recently, i.e. gold price manipulation, that covers among other things prominent whistleblower Andrew Maguire, the distinction between physical and paper gold, and position limits. A must read for anyone who is still concerned about buying gold. All we have to say to these people is - please look at the chart of the "efficient market" below, look at a chart of gold price, and tell us which you would rather be invested in.

It is now time to short Apple: Fannie Mae has just announced that it will no longer condone the same kind of irresponsible behavior that the Obama administration will soon be trying hard to codify into law, namely strategic defaulting. According to Dow Jones,  bankrupt GSE Fannie Mae, announced "it won't back new mortgage loans for seven years for homeowners who walk away from their mortgages although they were able to pay or did not seek a workout in good faith with their lender." Terence Edwards, an EVP for Fannie, after having been a recipient of trillions in moral hazard (and having a job as a result), finds out that being on the receiving end of a total lack of integrity is not quite as pleasant: ""We're taking these steps to highlight the importance of working with your servicer. Walking away from a mortgage is bad for borrowers and bad for communities." Oh, now they tell us.

Earlier, we pointed out the abysmal results of the most recent 5 Year Portuguese auction, which came in at a whopping 4.657%, nearly 1% higher than the last such auction from just a month ago, which then closed at 3.7%. Alas, the deteriorating funding environment in Portugal is not a fluke - according to the Bank of Portugal, bank borrowings from the ECB surged in the past month, and doubled from €17.7 billion to €35.8 billion in May. As Steven Major from HSBC said, quoted by the FT: "These yields are approaching that magic number of 5 per cent that is likely to be charged by the European stability fund. If the yields keep going up at this rate, then they will be paying much more than 5 per cent next month, which is arguably unsustainable." And confirming the non rose-colored glasses reality was another banker who said: "These yields are not sustainable. Portugal will have to access the emergency stability fund if they continue to rise at this rate." Elsewhere, Greece continue to be bankrupt.

The kneejerk reaction to the completely unsurprising FOMC statement was down... Which is why the corresponding 12 handle move up in the ES is perfectly understandable... as long as one understands that our market is totally broken. 12 handles in 1 minute as the market went offerless! Have fun with that. As we noted earlier, ignore the record new home sales number: the algos will not let this market go until they melt it up to some gargantuan level. Good work computers - once again you have thrown out any marginal homo sapiens investors as anyone who doesn't think in binary has now lost all faith in stocks for good.

Just out from Reuters: Barney Frank has introduced the Frank Bank Levy Proposal, which would tax banks with more than $50 billion in assets, and hedge funds with more than $10 billion, and use the money to fund $4 billion for neighborhood assistance and foreclosure help for the jobless with good credit. In other words, big banks and hedge funds will be funding Obama's next stimulus for his core constituency.

Another completely irrelevant announcement from the "ZIRP4EVA" Fed. The only sane human being, Tom Hoenig, continues to have no friends. Only notable part of the statement: "Housing starts remain at a depressed level. Financial conditions have become less supportive of economic growth on balance, largely reflecting developments abroad." On Hoenig's dissent: "Voting against the policy action was Thomas M. Hoenig, who believed that continuing to express the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted because it could lead to a build-up of future imbalances and increase risks to longer-run macroeconomic and financial stability, while limiting the Committee’s flexibility to begin raising rates modestly." Precisely what he said two months ago: no change in Hoenig's dissent. No change.

"What is becoming clearer, especially after the latest reports on housing starts, permits, resales and builder sentiment surveys, is that housing is already double dipping in the U.S. The MBA statistics just came out for the week of June 18 and the new purchase index fell 1.2% – down 36.5% from year-ago levels and that year-ago level itself was down 22% from its year-ago level. Capish, paisan? So far, June is averaging 14.5% below May’s level and May was crushed 18% sequentially, so do not expect what is likely to be an ugly new home sales report for May today to be just a one-month wonder. Meanwhile, the widespread view out of the economics community is that we will see at least 3% growth in the second half of the year: fat chance of that." - David Rosenberg

At least according to NBC News, quoting US Sources. According to AP, he will be replaced by Petraeus. The teleprompter's appearance in 5 minutes should confirm or deny.

Today's 5 Year $38 billion auction came in at a 1.995% high yield: not a record, unlike yesterday's 2 Year Auction, but still the lowest since April of 2009, when it was 1.93. The high yield came in 3.4 bps weak of the When Issued. The Bid To Cover came in at 2.58, compared to last auction's 2.71, and right on the one year average of 2.58. Direct bidders came in at 10.4%, indirects, at 34.6% were the lowest since July 2009, while primary Dealers took down the highest amount, or 55%, since July 2009 as well. Median yield was 1.925 and the low yield was 1.80%, with 18.36% allotted at the high yield of 1.995%.

This is bad to very bad. Coast guard reports two deaths have occurred in the containment effort. Not all is lost - in what probably shouldn't pass for an attempt at humor yet achieves precisely that, the US coast guard said the oil flow is not completely unrestrcited, and some oil was being burned off on the surface. Nothing like a little oil rain for the already happy happy gulf region.

With everyone anticipating the SNB to intervene and keep the CHF lower, the orderbook got for too onesided once again. So after days of the currency increasing without any intervention, and way too many EURCHR longs getting pummeled by margin calls, we just saw an unprecedented move higher in the CHF: precisely what the SNB hates to see. This is an isolated move, not seen in any other asset class, likely indicating some major FX fund just got wiped out on its EURCHF losses. Note the magnitude and sharpness of the move. And a much scarier question: is the SNB now buying CHF in an attempt to undo all its prior interventions, knowing full well we are approaching game over time, now that suddenly everyone is practicing bizarro economics and trying to strengthen their currencies?

Reuters headlines for now, but just goes to show what happens if you think you can take on Obamanataion head on. In the meantime, for those interested, below is the full ruling of Judge Feldman granting a preliminary injunction and overturning Salazar's deepwater drilling ban.